$100bn bonds boost to underwrite deficit, cover earlier bond issues
The Australian 12:00AM December 21, 2016
David Uren
Treasury will be raising a record $100 billion from bond issues this year to cover both the increase in the budget deficit and maturing bond issues, while the Reserve Bank has warned that elevated levels of household debt may limit future interest rate cuts.
Rising debt levels are at the heart of ratings agency concerns about Australia’s outlook, with government debt rising to about 40 per cent of GDP while household debt is 125 per cent, or more than $2 trillion.
Treasury’s debt agency, the Australian Office of Financial Management, released an investor presentation yesterday aimed at retaining the interest of global fund managers in a continuing flow of Australian bonds, highlighting Treasury’s budget update forecast Australia would continue to achieve superior economic growth to other advanced economies over the next five years.
The AOFM also emphasised the importance of the services sector, which represents 75 per cent of the economy, to offset international concerns about a vulnerability to resources and the Chinese economy. Government bonds on issue will rise to just under $500bn by June, almost twice the level at June 2013 ahead of the change in government.
Foreign interest in Australian government bonds appears to have weakened, with no increase in overseas holdings over the past two years while their share of bond holdings has dropped from more than 80 per cent to less than 60 per cent in the past four years.
However, the AOFM said Australian bonds were still held by 74 per cent of the top 30 global fund managers. Total bond issues over 2016-17 will rise from the $90bn expected at the time of the May budget to $100bn, 8 per cent more than last year.
Some of this reflects the rise in the estimated debt, but the AOFM must refinance maturing bonds and has been buying back shorter term bonds to lengthen the average term of government debt. The net bond issues will rise 48 per cent to $73.8bn.
A note by Moody’s sovereign analyst Marie Diron yesterday said deficits would be worse than the government expected and the return to budget surplus would take longer. She said the resulting rise in federal and state government debt to 41.9 per cent of GDP by 2018 was still in line with other AAA-rated economies.
The agency’s biggest concern was the potential for a fall in housing prices, which would have a negative impact on the economy and the banks.
Minutes of the Reserve Bank’s December board meeting also show concern about the housing market. “Members discussed the effect of lower interest rates on asset prices and decisions by households to borrow, particularly given already high levels of household debt,” they said.
While lowering rates over recent years, the board had been balancing the benefits of supporting growth and achieving the inflation target with the potential risks to financial stability resulting from rising household debt.
“These are indications the RBA, under governor Lowe, is placing a little more emphasis in policy settings on asset prices and financial stability than it did under former governor Stevens,” Commonwealth Bank senior economist Gareth Aird said.